The IMF said on Wednesday private sector involvement (PSI) was fundamental to a Greek bailout and urged Athens to move faster on fiscal and structural reforms to avoid a debt default.
The International Monetary Fund, which provided a 110-billion-euro lifeline to Greece along with the EU a year ago, said Athens has put in place measures to correct past inertia blamed for missing some bailout deal targets and now implementation was key.
If reforms are not in place, debt is not sustainable, that's for sure, the IMF's mission chief for Greece, Poul Thomsen, told a conference call.
The IMF said euro zone countries needed to decide how they would help Greece and that private sector involvement in a second bailout for the country was appropriate.
Given the impact PSI could have on Greece's credit rating, it is imperative for euro area member states to put in place mechanisms to guarantee liquidity support to Greece's banking system while a PSI operation is undertaken, it said.
Fitch caught up with other rating agencies and downgraded Greece to CCC, deeper into junk territory, citing the absence of a new and fully funded financing program for the country.
It said uncertainty surrounding the role of private creditors in any future funding programs from the EU and the IMF also weighed on the decision, as well as Greece's weakening macroeconomic outlook.
While the main parameters of a new multi-annual adjustment program were discussed at an Ecofin meeting on 11-12 July, no further clarity on the volume and the terms of new money or the nature of private sector participation was forthcoming, it said.
Last year's bailout foresaw Greece returning to bond markets in 2012 but high borrowing costs are keeping the debt-ridden country away, forcing its partners back to the drawing board to keep the debt crisis spreading to the rest of the euro zone.
The IMF said Greece had hired advisers to help design private sector voluntary debt rollover and that more time was needed to flesh out proposals. Its staff had cautioned the government against giving incentives for creditors to participate, it added.
The scope of the PSI operation is under discussion, but would likely extend through at least mid-2014 and aim to draw in wide participation by the private sector to deliver a substantial reduction in Greece's funding needs, it said.
The IMF said Greece's economy would contract more than previously expected and debt would soar even more despite far-reaching deficit-cutting measures.
In its latest review of the debt-choked country, it praised the socialist government for deciding some taboo-breaking measures but said fast action was now needed to catch up.
The authorities now need to move to vigorously implement these policies in a timely manner. Implementation will be the key subject for future reviews, it said.
The report effectively concludes the fund's fourth review ahead of a fifth, 15-billion-euro EU/IMF bailout tranche which has already been approved.
This urges the need for a faster pace in growth-enhancing structural reforms in Greece and a more comprehensive approach by the EU and IMF's policy to deal with Greece's fiscal sustainability program, EFG Eurobank economist Platon Monokroussos said, when asked to comment on the review.
Asked whether the IMF would provide further support to Greece, Thomsen said no request had been made.
The IMF revised its projections for growth, saying GDP would contract by 3.8 percent this year, compared to 3.0 percent predicted in the previous review, and said debt would peak at 172 percent of GDP in 2012.
Fitch said it saw contraction at 4 percent in 2011, followed by a weak recovery next year. It said asset sales in 2011 appear feasible but the privatization plan will be increasingly challenging.
The Fund praised the recent creation of a privatization agency to help rake in a targeted 50 billion euros in proceeds until 2015, and said the target was ambitious but achievable.
The catalyst for the debt sustainability is the ambitious privatization program which will send a strong message to the markets, Nikos Magginas, economist at National Bank of Greece, told Reuters after the review was issued.
Measures improving tax administration to boost revenues and technical assistance to put them into effect are key to the success of the program, as is wider political support in the country, it said.
The conservative opposition has opposed the bailout plan, saying it stifles the economy, but supports some state selloffs. A public resentful with austerity has staged almost daily protests against the measures.
This program does face significant implementation risks going forward but it represent the best option to resolve Greece's challenges and avoid broader contagion in Europe, the IMF said.
(Additional reporting by Renee Maltezou, Lefteris Papadimas and Greg Roumeliotis; Editing by Peter Millership and Andrew Hay)